What Recovery Looks Like: Sane Analysis from a Fair-and-Balanced Economist

You can listen to all the talk of Krugman-Ferguson "war" or recession-is-over "data" or Obama-is-bailing-on-us-for-vacation "crazy" you like, but one scholar is scared about the global comeback for a reason. Plus: what an actual socialist thinks of the health-care blowback!

It was pretty hilarious to see Michelle Bachmann and her fellow Republicans up in arms last week about "rationing," which is GOP propaganda for any kind of cost controls on anything. Didn't the Republicans used to pretend to be the party of fiscal prudence? Aren't they rising up against health-care reform because they think it will be too expensive? Isn't carving 47 million people out of the "best health care system in the world" a massive form of rationing? Didn't they spend decades trying to put cost controls on welfare? Didn't they oppose Medicare from the very beginning? Didn't they spend the last few decades arguing for means testing? And raising the age limits? Didn't George Bush try to "privatize" Social Security just four years ago? Is everything uttered by American's conservative leadership just a vicious lie?

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But after threestraightweeks of it, I'm taking a break from "The Crazy," as it has been so aptly described. (For more fulminations, read Joe Klein's artfully argued new piece in Time, or check out the consistently terrifying news clips dutifully assembled each day over at Crooks and Liars). Instead, let us turn to the bracing sanity of one of the nation's most balanced economists: Carmen Reinhart, from the University of Maryland's School of Public Policy.

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The good news is that we are definitely starting to climb out of this recession, she told me recently. It's all uphill from here.

The bad news: "What does the recovery look like? I think that the recovery is going to lack the stamina that some of the financial markets have been anticipating," Reinhart warns. "We have unresolved problems in the banking sector a lot of non-performing assets that are bringing down bank balance sheets."

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Last year, Reinhart predicted the length of this recession in a paper with Harvard's Kenneth Rogoff called "The Aftermath of Financial Crisis" (PDF). They turned out to be exactly right, almost to the day. And last week they released a mass of supporting data in their meticulously researched historical analysis of recessions and depressions, published by Princeton University Press under the mournfully sarcastic title This Time It's Different: Eight Centuries of Financial Folly.

"Before we get back to the income level we had before the crisis started that's a different question," she says. "Our numbers show that the peak of the crisis to recovery takes over four years in terms of income. But there are other things that take longer, like housing prices and employment."

With the Great Depression, for example, full recovery took ten years in the United States, twelve years in Canada, and seven years in the France and the United Kingdom. This time, the optimists are hoping we'll have something more like our post-WWII recessions, which lasted less than a year on average. But that's improbable, Reinhart says, because of the global nature of the recession. "Europe is mired with problems, Japan is mired with problems, Mexico is actually having a bigger drop in its GDP this year than it did during its massive 1994-95 crisis," she explained. "And it's usually exports that pull economies out of crisis, as they did in Mexico in 1995, in Scandinavian countries (except Finland) in the early 1990s, in Asia in 1998. Even in Japan, which limped along for ten years, exports were still doing well relative to domestic demand. So what I'm saying is, in all these crises it was a local problem, not a global problem. The global nature of the problem is going to mean that exports aren't going to help."

What about the money everyone says is sitting on the sidelines?

"Point me in the direction of what sector is going to spearhead this recovery. Have we worked down the excesses that were created in construction, for example? I think the answer is still no."

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On the contentious question of Bush's bailout and Obama's stimulus, Reinhart agrees with the overwhelming majority of economists: "It was necessary. Also, the danger of withdrawing it too soon as the U.S. did in the Depression and Japan did during the Lost Decade is a very live source of concern. We don't want to play with fire and withdraw it too quickly."

Reinhart sees complexities, as honest people always do. "I think getting Pollyannaish and thinking that the stimulus is going to be the source for a V-shaped recession and that it doesn't come without a price tag is foolish," she says. "I mean, we're piling on the debt right, left, and center."

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Still, lots of people don't care that the recession is global or that it happened under George W. Bush's watch. Like the Germans in the 1930s, they are angry and they are looking for someone to blame.

From the Mailbag: A Real Debate with a Real Socialist

This month'sseries on my travels with the "birthers" got a ton of response (thanks for writing!), but none more unexpected than this:

Hi John.

I was born in the Soviet Union and lived there for 30 years before coming to this country 20 years ago. I thought that the type of things you're reporting in your article is a normal part of American festive and rebellious spirit. Am I wrong?

See, I, for one, along with my Russian wife, have over the years developed such a "world-feel" here where being conscious of our own being, our own spot on earth and perspective on things and not belonging a priori to any collective national or political schema is how we make sense of our lives in America.

It don't matter much that like in our case we disagree with probably 99% of Americans on important things. What matters is that we don't kill each other every time we talk to our neighbors. For this reason the ideas of secession, for example, do not scare me. Putting up fences to "make good neighbors" is better than government suppression in the name of national security or collective good...

Best,

Mikhail Dvortsov

I wrote back, hoping that America didn't end up permanently divided by those fences. He responded the next day:

For a long time I thought the same way. Especially because "being social" was imprinted in my upbringing. But this is the same problem I encountered years ago when as a young man and member of Young Communists Union I was cheerfully supporting the idea of communism for all humanity. To me it meant simply embracing and taking care of each other, an attitude of equality and fairness. What I couldn't figure out was this: what if a person who in all other respects is not "evil" or violent when approached to accept communism says: "Thanks, but no thanks. I'll stay a capitalist"? On what grounds do we coerce him to accept our vision?

The Soviet system's answer to that was that communism was objectively true, that it comes to replace capitalism by historical necessity. And so our stubborn capitalist was simply not recognizing the truth, was a victim of "false consciousness." The way to deal with him was more education and, if his illusions persist, with incarceration. I was not ready to accept this route. History is not predestined. There is no one to tell us what the right path is. So my conclusion is, if our disagreements are irreconcilable, let's think about most peaceful methods to part way...

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Again I responded, thanking him for his deep thoughts: "But sympathetic as I am, I also remember Hannah Arendt writing in Eichmann in Jerusalem, speaking of his deference to his Nazi leaders and their judgment, that 'he was not the first man who was undone through modesty.' Despite the indeterminacy of everything and the impossibility of objective knowledge, sometimes a man must take a stand."

Dvortsov wrote back the next day:

I am with Obama on the way he is proposing to change our health care system. I love watching him doing that. He is very smart and very respectful towards the opposition. He said yesterday to people who think that government has no role in this that "it is a legitimate disagreement."

But the words of a woman from a town-hall meeting keep ringing in my ears: "I don't want to pay for someone else's health care." This is of course stupid, because that's not what Obama is proposing he is restructuring the system such that the savings from it will afford creating a public option without eliminating a private marketplace. There is no increase in her taxes. But in principle her stand is not stupid. She has nothing to do with millions of people that came to life without her permission. She feels no connection to them. She knows nothing of how they live, why they choose things, how their needs arise. Her idea of "we are all Americans," like probably for many conservatives and libertarians, means that "we are free from each other," that it is up to her to decide who to care for and why.

I think I am sympathetic with such stand. Half of my life I was told what a collective good is and to submit to it. I never had a chance to decide who I want to be caring for or to stop caring when I want to opt out. So I don't know what to say to this woman. I feel I am split. I like both stands.

I have to admit it forced me to stop and think, hearing these tea-party-esque arguments made in such a nuanced way by someone who actually experienced socialism real socialism, not the false label pasted on Obama by demagogues who don't realize that socialism is "collective ownership of the means of production." So I wrote again:

"Actually, Mikhail, I am very close to agreeing with you and with the Tea Party folks, for that matter. Governments should be modest and careful when it decides to compel the people to any collective action, if for no other reason than because the freedom of the individual is close to the essence of America. But individual freedom is not the only important thing. These Tea Party types are promoting an essentially anarchistic vision of this country, forgetting that it was also rooted in the idea of the 'commonwealth.' These things are in contradiction, but hopefully they operate in fruitful contradiction in a dialectic leading to a greater synthesis, if that doesn't set off too many alarms in your communist background. Because the consequences of anarchistic freedom in our medical system include millions of sick or bankrupt people and the relentless rise of health care expenses, I think that greater synthesis must include a cautious, collective approach to health reform, just as we care for our old people collectively and fight our wars collectively and maintain our highways and nuclear waste and prisons collectively. It's the right thing to do, and the practical thing to do."

Mikhael wrote back:

Your idea of "fruitful contradiction" is bright, John. Maybe too bright. But are you realistic when you diagnose the state of our health system as an effect of an anarchistic vision? The opposite view, that the system is actually over- and mis-regulated has plenty of evidence, as pointed out by our President himself. What was the figure, $60 billion or so that Obama identified as a waste created by the system? You will be hard pressed, John, to contend that it was an "anarchistic," free to shop-and-pay system, open to self-regulatory price competition, that has been responsible for healthcare cost increases...

And so it continued, a real debate that actually brought us closer together. I suspect this because of the bloody history behind Mikhael's hard-earned words:

What matters is that we don't kill each other every time we talk to our neighbors.

I just sure hope we don't have to find out.

Questions? Comments? Concerns? Click here to e-mail John H. Richardson about his weekly political column at Esquire.com.